Final Results

NEWS RELEASE 24 February 2015

GKN plc Results Announcement for the year ended 31 December 2014

Group Highlights(1)

· Sales increased 4% organically; decline of 2% after £403 million adverse currency translation impact

· Trading margin improved to 9.2%

· Profit before tax (management basis) up 4%, after £38 million of adverse currency more than offsetting the absence of restructuring costs of £25 million charged in 2013

· Reported profit before tax was £221 million (2013: £484 million), lower primarily due to the £232 million movement on the mark to market valuation of forward foreign exchange contracts

· Earnings per share up 1%, impacted by an increased tax rate to 22% (2013: 20%)

· Total dividend increased 6% to 8.4 pence per share

· Return on average invested capital of 17.7% (2013: 17.3%)

· Free cash flow of £234 million (2013: £346 million), after £54 million repayment of a UK Government refundable advance and increased capital expenditure to fund future growth

· Net debt of £624 million, £108 million lower than last year.

Commenting on the results, Nigel Stein, Chief Executive of GKN said:

"This was another good performance, particularly in our automotive businesses, with GKN Driveline delivering 8% organic sales growth and an 8.1% trading margin while GKN Powder Metallurgy achieved an 11.0% margin. GKN Aerospace delivered another good result. We have continued to outperform our key markets and report good underlying financial results in spite of sterling's strength and some end market weakness, particularly in Land Systems. Looking forward we expect 2015 to be another year of growth."

Divisional Highlights

GKN Aerospace

· Organic growth of 4% in commercial aerospace with military broadly flat

· Commercial aircraft order book remains strong

· New work packages won exceeded $3 billion over contract lives

GKN Driveline

· Growth significantly ahead of global auto production helped by our broad geographic footprint and increasing content per vehicle

· Trading margin of 8.1%, into target range of 8-10%

· Successful launch of first complete integrated all-wheel drive (AWD) system with Fiat-Chrysler

GKN Powder Metallurgy

· Growth ahead of global auto production and trading margin of 11.0%, at top end of target range

· Continued expansion of Chinese production; upgrade of North American capacity in progress

· Strong focus on technology and £165 million annualised new and replacement business won

GKN Land Systems

· Organic sales down 10% due to challenging agricultural equipment market

· Trading margin fell to 5.7% despite strong cost control

· Continued to broaden the business through investment to support industrial sales in North America and capability in China

· £120 million annualised new and replacement business won

Outlook

Commercial aircraft production should continue to be strong whereas military markets are forecast to decline. GKN Aerospace's 2015 organic sales are expected to be broadly flat, reflecting these differing trends and the phasing of our programmes. However, a strong commercial order book supports attractive growth for GKN Aerospace over the medium term.

In automotive, external forecasts predict growth in global light vehicle production of around 2% with increases in China and North America, and Europe flat. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow organically above the market.

Softer global agricultural equipment markets are likely to more than offset the slight improvement in industrial markets. As a result, GKN Land Systems 2015 sales are expected to be lower than 2014 and an £8 million restructuring charge is planned to further reduce the fixed cost base.

Although some markets remain challenging, 2015 is expected to be a year of further growth. Beyond 2015, we are well positioned to outperform in our large global markets.

Notes

(1) Financial information set out in this announcement, unless otherwise stated, is presented on a management basis as defined on page 14.

Quarterly Reporting

Further to the recent developments in interim reporting requirements, GKN will not issue an IMS on its first quarter results but will give a trading update some time before the Annual General Meeting on 7 May 2015.

Cautionary Statement

This announcement contains forward looking statements which are made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated. Nothing in this document should be regarded as a profits forecast.

Further Enquiries

Analysts/Investors:

Guy Stainer, Investor Relations Director, GKN plc

T: +44 (0)207 463 2382

M: +44 (0)7739 778187

E: [email protected]

Media:

Chris Fox, Group Communications Director, GKN plc

T: +44 (0)1527 533238

M: +44 (0)7920 540051

E: [email protected]

Andrew Lorenz, FTI Consulting

T: +44 (0)203 727 1323

M: +44 (0)7775 641807

There will be an analyst and investor meeting today at 09.00am at UBS, Ground Floor Presentation Suite, 1 Finsbury Avenue, London EC2M 2PP.

A live videocast of the presentation will be available at http://www.gkn.com/investorrelations/Pages/Webcasts.aspx.

Slides will be put onto the GKN website approximately 45 minutes before the presentation is due to begin, and will be available to download from the GKN website at: http://www.gkn.com/investorrelations/Pages/results-and-presentations.aspx?year=2014.

Questions will only be taken at the event.

A live dial in facility will be available by telephoning: +44 (0) 1452 555 566, Conf ID: 82403591

A replay of the conference call will be available until 24 March on:

Standard International Number: +44 (0) 1452 550 000

Replay Access Number: 82403591

This announcement together with the attached financial information thereto may be downloaded from: www.gkn.com/media/Pages/default.aspx.

NEWS RELEASE

GKN plc Results Announcement for the year ended 31 December 2014

Group Overview

Markets

The Group operates in the global aerospace, automotive and land systems markets. GKN Aerospace sells to manufacturers of commercial and military aircraft, aircraft engines and equipment. In the automotive market, GKN Driveline sells to manufacturers of passenger cars and light vehicles. Around 80% of GKN Powder Metallurgy sales are also to the automotive market, with the balance to other industrial customers. GKN Land Systems sells to producers of agricultural, industrial, construction and mining equipment and to the automotive and commercial vehicle sectors.

Results

Organic sales increased £303 million (4%). The adverse effect of currency translation on management sales was £403 million (5%) and there was a £7 million benefit from acquisitions which was more than offset by a £45 million reduction due to disposals.

Organic trading profit increased £66 million, due to the absence of restructuring costs (2013: £25 million), the strong performance of three of our divisions, lower profits from GKN Land Systems and £6 million net benefit from commercial settlements and provision releases. Adverse currency translation was £38 million and there was a £2 million reduction due to acquisitions and divestments.

Group trading margin increased to 9.2% (2013: 8.7% or 9.0% excluding restructuring charges). Return on average invested capital (ROIC) increased to 17.7% (2013: 17.3%).

Divisional Performance

GKN Aerospace

GKN Aerospace is a leading global tier one supplier of airframe and engine structures, components, assemblies and transparencies to a wide range of aircraft and engine prime contractors and other tier one suppliers. It operates in three main product areas: aerostructures, engine components and sub-systems, and special products.

The overall aerospace market remained positive in 2014 driven by a growing commercial aircraft market partly offset by a declining military market. The division's commercial sales were 73%, with military representing 27%.

Commercial aircraft production is still growing. Both Airbus and Boeing continue to benefit from higher deliveries and a record order backlog, and both have announced plans to increase production levels for single aisle aircraft in the future. There is also more demand for strong global suppliers to support their expansion plans.

Military spending remains under pressure, largely driven by cutbacks throughout the USA and Europe, with the ramp-up of new programmes being delayed and overseas military operations reduced.

The key financial results for the year are as follows:

Overall, GKN Aerospace's organic sales were £59 million higher (3%). There was an adverse £76 million (3%) impact from currency translation.

Organic commercial aerospace sales were 4% higher, driven by increased demand for the Boeing 787, A350 and engine spares, partly offset by lower A330 and A380 sales and a £17 million reduction due to the previously announced supply chain contract taken back in-house by Airbusin May 2013. Military sales were broadly flat as spares on programmes which ceased production were offset by lower sales for F/A-18 Super Hornet and UH-60 Blackhawk helicopter.

The organic increase in trading profit was £18 million, the impact from currency on translation of results was £10 million adverse (4%) and there was a £3 million benefit relating to losses from the Composite Technology and Applications Limited (CTAL) disposal in 2013.

Each year there are commercial issues and provision movements which impact the results. This year they amounted to a £4 million net benefit, which included a credit of £11 million as progress was made on an onerous contract partly offset by a £7 million charge for customer claims. Trading profit also included income of £8 million (2013: £5 million) for milestones achieved in relation to CTAL, which is not expected to be repeated in 2015.

Other factors included improved commercial spares sales and higher volumes on new programmes offset by lower military sales on mature programmes. Further start-up operating losses at the new A350 facility were £8 million (2013: loss of £11 million). Trading margin was 12.4% (2013: 11.9%).

Return on average invested capital was 17.7% (2013: 17.8%), following the repayment of a Government advance in the first half of the year.

During the year a number of important milestones were achieved including:

· a new 7% (US$2.5 billion) risk and revenue sharing partnership (RRSP) with Pratt & Whitney covering the supply of components for the PurePower® PW1900 Geared Turbofan™ engine for the Embraer 190 and the 195-E2 narrow body aircraft;

· a long term agreement (LTA) worth more than US$200 million with Rolls-Royce to supply components for the latest version of the Trent 1000 engine, a capability enhancement of the existing Trent 1000 engine for the Boeing 787;

· a contract from Boeing for the final assembly and paint of Advanced Technology (AT) Winglets for the new 737 MAX;

· investment and work being transferred into our low cost manufacturing facilities in Mexico; and

· leading collaborative projects backed by the UK's Aerospace Technology Institute for additive manufacturing and future wing research.

Automotive market

Production in the major automotive markets of China, North America, Europe and Japan increased relative to 2013, while Brazil and India declined. Overall, global production volumes increased 3.1% to 87.4 million vehicles (2013: 84.8 million).

Source: IHS Automotive; (*) Growth is derived from unrounded production figures

Production in Europe increased despite a large decline in Russia due to political uncertainty. Production of premium vehicles remained robust due to export demand while there was some recovery in smaller low cost vehicles helped by state and OEM incentives.

Production in North America benefitted from improved consumer confidence and further localisation of foreign manufacturers' capacity.

Production growth in China slowed with the general economy, but still increased 8% due to strong consumer demand. Japanese production increased 2% due to a strong first quarter to satisfy demand prior to April's consumption tax increase but production weakened thereafter and off-shoring of production continued. The markets of Brazil and India were down as a result of weak economic conditions and low consumer confidence. 

External forecasts anticipate global production in 2015 will increase 2% to 89.5 million vehicles. The major markets where production is expected to grow the most include China (7%), India (6%) and North America (3%). Production in Europe is forecast to be virtually flat on 2014 as any increase in western Europe is offset by continued problems in Russia. Brazil is forecast to increase 2% compared with a very weak 2014 and Japan is expected to contract by 5%.

GKN Driveline

GKN Driveline is the world's leading supplier of automotive driveline systems and solutions. As a global business serving the leading vehicle manufacturers, it develops, builds and supplies an extensive range of automotive driveline products and systems - for use in everything from the smallest low-cost car to the most sophisticated premium vehicle demanding complex driving dynamics.

The key financial results for the year are as follows:

Organic sales increased by £265 million (8%) compared with global vehicle production which was up 3%. The adverse effect of currency translation was £226 million (7%) and the impact from disposals was £11 million, being the proportionate loss of sales from a wholly owned business in China which was transferred into our Shanghai GKN HUAYU Driveline Systems Co Limited (SDS) joint venture in November 2013. Constant Velocity Jointed (CVJ) Systems accounted for 60% of sales and non-CVJ sales were 40%. 

GKN Driveline's market outperformance was broadly based across the main markets reflecting recent market share gains, a stronger position in premium vehicles, demand for which continued to be good, and GKN Driveline's broadening product mix, particularly with all-wheel drive (AWD) systems. GKN Driveline slightly underperformed the market in Japan due to our specific programme mix.

The organic improvement in trading profit was £53 million, including the absence of £16 million of restructuring charges reported in 2013. The adverse impact of currency translation on trading profit was £18 million (8%). Each year there are commercial settlements and provision movements which impact the results. In 2014, whilst individually larger than usual, they amounted to a £2 million net benefit. This £2 million included a commercial settlement credit of £14 million and a credit of £5 million as progress was made on an onerous contract, partly offset by a higher than usual £17 million charge for warranty and quality claims. GKN Driveline's trading margin was 8.1% (2013: 7.2%, or 7.7% excluding restructuring charges), reflecting higher organic revenue growth.

Return on average invested capital increased to 19.3% (2013: 17.0%).

During the year, over £700 million of annualised sales in new and replacement business was securedin CVJ and AWD systems and a number of important milestones were achieved, including:

· expanding facilities in Mexico and AWD capacity in Newton, USA;

· expanding facilities in China with new Power Transfer Unit (PTU) wins and localisation of AWD products from Europe and North America;

· design and launch of the world's first integrated disconnect AWD system for Fiat Chrysler's small SUV platform;

· eAxle new launches on advanced plug-in hybrid supercars, with the world's first 2-speed eTransmission on the BMW i8 and Porsche awarding GKN Driveline "Technology Partner" status for its development of a high-performance eAxle for the 918 Spyder; and

· 11 customer awards, including from Ford, GM, Mitsubishi, Nissan and Volvo.

GKN Powder Metallurgy

GKN Powder Metallurgy comprises GKN Sinter Metals and Hoeganaes. GKN Sinter Metals is the world's leading manufacturer of precision automotive sintered components as well as components for industrial and consumer applications. Hoeganaes is one of the world's leading manufacturers of metal powder, the essential raw material for powder metallurgy.

The key financial results for the year are as follows:

Organic sales at GKN Powder Metallurgy were £40 million higher (5%). There was an adverse £56 million (6%) impact from currency translation. Good growth was achieved in North America, China and Europe but sales in South America fell due to weaker automotive and industrial markets.

The organic increase in profit was £13 million, including the absence of £5 million of restructuring charges reported in 2013. The impact of currency translation was £6 million adverse (7%). The divisional trading margin was 11.0% (2013: 10.1%, or 10.6% excluding restructuring charges), reflecting the move towards higher value "design for powder metallurgy" parts.

Return on average invested capital was 21.8% (2013: 21.1%), reflecting the improvement in profitability.

GKN Powder Metallurgy continued its strong product and development activities in engines and transmissions, being awarded £165 million of annualised sales in new and replacement business. It also won a number of quality awards including: Excellent Supplier Award and Zero PPM 2014 Award from GETRAG (Jiangxi) Transmission Co., Ltd.; and four Supplier Quality Excellence awards from General Motors.

Reflecting our move into more advanced applications of powder metal technologies, GKN Powder Metallurgy is expanding its facilities in North America with more complex and efficient tooling and presses. It has signalled its commitment to the Chinese market with the expansion of its two production facilities there and also announced a technology collaboration agreement with McPhy Energy to develop solid state hydrogen storage solutions.

During the year, Hoeganaes made progress in the development and commercialisation of high technology powders for additive manufacturing. For example, highly alloyed tool steels, nickel based alloys and specialised stainless steel powders have been developed and the first commercial shipments made. Early development work also progressed on titanium powders for additive manufacturing. A new research titanium atomizer is currently being installed at the Powder Innovation Centre in the USA and will be commissioned during the first half of 2015.

GKN Land Systems

GKN Land Systems is a leading supplier of power management products and services. It designs, manufactures and supplies products and services for the agricultural, construction, mining and utility vehicle markets and key industrial segments, offering integrated powertrain solutions and complete in-service support.

Sales in GKN Land Systems were lower than the prior year primarily due to progressively worsening agricultural equipment markets while demand for construction and industrial equipment remained relatively stable.

The key financial results for the year are as follows:

The organic decrease in sales was £84 million (10%) and the adverse impact of currency translation was £40 million (5%). The organic decrease in sales included £14 million due to the previously announced cessation of two chassis contracts in the second half of 2013. The acquisition impact of £1 million related to our wheels venture in China.

The organic decrease in trading profit was £27 million, including the absence of £3 million of restructuring charges in 2013. The negative impact of currency translation was £4 million (6%). Trading margin was 5.7% (2013: 8.3%, or 8.7% excluding restructuring charges). In 2015, there is expected to be an £8 million restructuring charge reflecting actions being taken to further reduce the fixed cost base in response to difficult market conditions.

Return on average invested capital was 11.4% (2013: 18.3%).

Good progress was made towards winning new business and implementing the GKN Land Systems strategy through broadening its product offering and geographic footprint, particularly investing to support industrial product sales in North America and enhancing capacity in China.

Other Businesses and corporate costs

GKN's Other Businesses comprise Cylinder Liners (which is a 59% owned venture mainly in China, manufacturing engine liners for the truck market in the US, Europe and China), our joint venture stake in EVO Electric (a developer of axial flux motors) and the activities relating to GKN Hybrid Power, acquired on 1 April 2014 from Williams Grand Prix Engineering Limited. Since the acquisition, GKN Hybrid Power has secured orders to fit 750 buses with its innovative fuel-saving solution.

GKN sold its 50% stake in Emitec for a cash consideration of £37 million on 31 July 2014.

GKN's Other Businesses reported combined sales in the year of £94 million (2013: £104 million), reflecting a £23 million organic increase in sales and £6 million benefit from acquisitions, more than offset by the £34 million impact from disposals and £5 million adverse currency translation. Trading profit was £5 million (2013: £5 million).

Corporate costs, which comprise the costs of stewardship of the Group and operating charges and credits associated with the Group's legacy businesses, were £20 million (2013: £25 million), primarily due to a lower charge in relation to future incentive schemes.

Other Financial Information

Items excluded from management trading profit

In order to achieve consistency and comparability between reporting periods the following items are excluded from management measures as they do not reflect trading activity:

Change in value of derivative and other financial instruments

The change in value of derivative and other financial instruments during the year resulted in a loss of £209 million (2013: profit of £26 million).

When the business wins long term customer contracts that are in a foreign currency, the Group offsets the potential volatility of the future cash flows by hedging through forward foreign exchange contracts. At each period end, the Group is required to mark to market these contracts even though it has no intention of closing them out in advance of their maturity dates.

At 31 December 2014, the net fair value of such instruments was a liability of £180 million (2013: asset of £52 million) and the change in fair value during the year was a £232 million charge (2013: £19 million credit).

There was also a £4 million credit arising from the change in the fair value of embedded derivatives in the year (2013: £4 million charge) and a net gain of £19 million attributable to the currency impact on Group funding balances (2013: £11 million net gain).

Amortisation of non-operating intangible assets arising on business combinations

The charge for the amortisation of non-operating intangible assets arising on business combinations (for example, customer contracts, order backlog, technology and intellectual property rights) was £69 million (2013: £75 million).

Gains and losses on changes in Group structure

The net gain on changes in Group structure was £24 million (2013: £12 million).

On 31 July 2014, the Group sold its 50% share in Emitec, a joint venture company, for a cash consideration of £37 million. The carrying value on the date of disposal was £14 million and £1 million of previous currency variations were reclassified from other reserves resulting in a profit on sale of £24 million.

Impairment charges

Consistent with previous years, goodwill was tested for impairment. As a result of difficult markets and reduced sales of certain products during the year an impairment charge of £69 million (2013: nil) has been recorded in respect of three cash generating units; two in Aerospace and one in Land Systems. Additionally, an impairment charge has been recorded against the carrying value of an investment balance of £4 million in Other Businesses.

Post-tax earnings of joint ventures

On a management basis, the sales and trading profits of joint ventures are included pro-rata in the individual divisions to which they relate, although shown separately post-tax in the statutory income statement.

The Group's share of post-tax earnings on a management basis were £62 million (2013: £54 million), with trading profit of £75 million (2013: £64 million). The Group's share of the tax and interest charges amounted to £13 million (2013: £10 million). Underlying trading profit increased £13 million, reflecting a strong trading performance by our joint venture companies, primarily in China.

Net financing costs

Net financing costs totalled £129 million (2013: £128 million) and comprise the net interest payable of £73 million (2013: £73 million), the non-cash charge on post-employment benefits of £50 million (2013: £45 million), fair value changes in net investment hedges of £3 million credit (2013: nil) and charge for unwind of discounts of £9 million (2013: £10 million). The non-cash charge on post-employment benefits, fair value changes in net investment hedges and unwind of discounts are not included in management figures. Details of the assumptions used in calculating post-employment costs are provided in note 14.

Interest payable was £75 million (2013: £76 million), whilst interest receivable was £2 million (2013: £3 million) resulting in net interest payable of £73 million (2013: £73 million).

Interest charged on Government refundable advances was £7 million (2013: £6 million).

Profit before tax

Management profit before tax was £601 million (2013: £578 million). Profit before tax on a statutory basis was £221 million (2013: £484 million). The main differences between management and statutory figures are the change in value of derivative and other financial instruments, amortisation of non-operating intangible assets arising on business combinations, impairment charges and the interest charge on net defined benefit pension plans. Further details are provided in note 3 to the financial statements.

Taxation

The book tax rate on management profits of subsidiaries was 22% (2013: 20%), arising as a £121 million tax charge (2013: £105 million) on management profits of subsidiaries of £539 million (2013: £524 million). The book tax rate is likely to increase at a similar rate in 2015.

The Group's theoretical weighted average tax rate, which assumes that book profits/losses are taxed at the statutory tax rates in the countries in which they arise, is 37% (2013: 34%). The book tax rate was significantly lower, largely because of the recognition of deferred tax assets (mainly in the US) due to increased confidence in the Group's ability both to access the losses and realise future taxable profits that absorb brought forward tax deductions.

The cash tax rate was 13% (2013: 10%), primarily due to the utilisation of prior years' tax losses. The cash tax rate is expected to be similar to the book tax rate in 2015.

The tax rate on statutory profits of subsidiaries was 29% (2013: 18%) arising as a £47 million tax charge (2013: £77 million charge) on statutory profits of subsidiaries of £160 million (2013: £432 million).

Non-controlling interests

The profit attributable to non-controlling interests was £5 million (2013: £12 million, including £8 million from the pension partnership arrangement).

Earnings per share

Management earnings per share was 29.0 pence (2013: 28.7 pence). Average shares outstanding in 2014 were 1,640.6 million (2013: 1,634.7 million).

On a statutory basis earnings per share was 10.3 pence (2013: 24.2 pence), lower primarily due to the loss on mark to market of foreign exchange hedging contracts and impairment charges.

Dividend

In view of the continued improvement in trading performance and taking into account the Group's future prospects, the Board has decided to recommend a final dividend of 5.6 pence per share (2013: 5.3 pence per share). The total dividend for the year will, therefore, be 8.4 pence per share (2013: 7.9 pence per share). The Group's objective is to have a progressive dividend policy reflecting growth in earnings per share and free cash flow generation. The final dividend is payable on 18 May 2015 to shareholders on the register at 10 April 2015. Shareholders may choose to use the Dividend Reinvestment Plan (DRIP) to reinvest the final dividend. The closing date for receipt of new DRIP mandates is 24 April 2015.

Cash flow

Operating cash flow, which is defined as cash generated from operations of £765 million (2013: £782 million) adjusted for capital expenditure (net of proceeds from capital grants) of £403 million (2013: £349 million), proceeds from the disposal/realisation of fixed assets of £19 million (2013: £4 million) and repayment of the principal of a government refundable advance in the UK of £38 million (2013: nil) was an inflow of £343 million (2013: £437 million).

Within operating cash flow there was an outflow of working capital and provisions of £33 million (2013: £47 million outflow).

Capital expenditure (net of proceeds from capital grants) on both tangible and intangible assets totalled £403 million (2013: £349 million). Of this, £328 million (2013: £273 million) was on tangible fixed assets and was 1.5 times (2013: 1.2 times) the depreciation charge, higher than the previous year due to additional investment in the Automotive businesses in North America. Expenditure on intangible assets, mainly initial non-recurring costs on Aerospace programmes, totalled £75 million (2013: £76 million).

The Group invested £161 million in the year (2013: £149 million) on research and development activities not qualifying for capitalisation, net of customer and government funding.

Net interest paid totalled £83 million (2013: £65 million) including £16 million of previously accrued interest on a government refundable advance. Tax paid in the year was £68 million (2013: £52 million).

Free cash flow

Free cash flow, which is operating cash flow including joint venture dividends and after interest, tax, amounts paid to non-controlling interests and own shares purchased but before dividends paid to GKN shareholders, was an inflow of £234 million (2013: £346 million). The year on year change reflects increased capital expenditure of £54 million, repayment of a government refundable advance in the UK relating to the A350 programme of £54 million (including interest) and incremental pension funding of £12 million.

Net debt

At the end of the year, the Group had net debt of £624 million (2013: £732 million) after payment of a government refundable advance (including accrued interest) of £54 million. In September 2014, the Group entered into a series of cross currency interest rate swaps to better align its foreign currency income receipts with its debt coupon payments. The fair value of these derivative instruments at 31 December 2014 was a liability of £26 million which is included in the net debt figure of £624 million.

Pensions and post-employment obligations

GKN operates a number of defined benefit pension schemes and historic retiree medical plans across the Group.

At 31 December 2014, the total deficit on post-employment obligations of the Group totalled £1,711 million (2013: £1,271 million), comprising the deficits on funded obligations of £1,095 million (2013: £763 million) and on unfunded obligations of £616 million (2013: £508 million). The total deficit represents a £440 million increase since 31 December 2013 which is due primarily to significantly lower discount rates in all of the major territories where GKN operates post-retirement schemes. New US mortality assumptions have also contributed to the increase in the deficit, and these factors have been partly offset by strong asset performance.

The amount included within trading profit for the period comprises current service cost of £49 million (2013: £51 million) and administrative costs of £3 million (2013: £3 million), offset by a settlement credit of £9 million. The settlement credit related to a voluntary programme run in the US which offered deferred members the opportunity to take a cash lump sum in lieu of a future pension. Interest on net defined benefit plans, which is excluded from management figures, was £50 million (2013: £45 million).

Cash contributions to the various defined benefit pension schemes and retiree medical arrangements totalled £108 million (2013: £112 million).

UK pensions

The accounting deficit for UK schemes increased to £1,005 million (2013: £714 million), due to the application of lower discount rates.

Both UK pension schemes (GKN 1 a mature scheme and GKN 2 with a larger active and deferred population) underwent funding valuations as at 5 April 2013 and final agreement was reached on the valuation and resulting deficit recovery plan for each scheme during the year. The agreed deficit recovery plan requires payments of £10 million per year and the potential for further additional payments commencing in 2016, contingent upon asset performance. The first payment of £10 million was made during the year. This is in addition to a £30 million (2013: £30 million) annual payment made under the Group's pension partnership arrangement.

Early in the year, a bulk annuity pensioner "buy-in" was completed in relation to the UK pension scheme, GKN 1, as a result of which a proportion (c.12%) of GKN 1 liabilities are now fully insured. The transaction involved a payment of £123 million, made from GKN 1's assets. This gave rise to an additional scheme funding requirement of £8 million which the Group will pay to GKN 1 over a 4 year period. The first payment of £2 million was made during the year.

Defined contribution pension schemes

In addition to defined benefit pension schemes, the Group also operates a number of defined contribution schemes for which the income statement charge was £35 million (2013: £34 million).

Net assets

Net assets of £1,501 million were £294 million lower than the December 2013 year end figure of £1,795 million. The decrease includes management profit after tax of £480 million more than offset by dividends paid to equity shareholders of £133 million, currency on translation of subsidiaries and joint ventures net of tax and the change in value of derivative and other financial instruments of £182 million and a loss on remeasurement of defined benefit plans of £485 million.

Exchange rates

Exchange rates used for currencies most relevant to the Group's operations are:

The approximate impact on 2014 trading profit of subsidiaries and joint ventures of a 1% movement in the average rate would be euro - £1 million, US dollar - £4 million.

Funding, liquidity and going concern

At 31 December 2014, UK committed bank facilities were £880 million. Within this amount there are committed revolving credit facilities of £800 million (31 December 2013: £837 million) and an £80 million eight-year amortising facility from the European Investment Bank (EIB). The revolving credit facilities of £800 million, renegotiated during the year, mature in 2019, whilst the first of five equal, annual £16 million EIB repayments falls due in 2015. At 31 December 2014, the £80 million EIB facility was fully drawn (2013: £80 million fully drawn) and there were no drawings on any of the UK revolving credit facilities (2013: no drawings).

Capital market borrowings at 31 December 2014 comprised a £350 million 6.75% annual unsecured bond maturing in October 2019 and a £450 million 5.375% semi-annual unsecured bond maturing in September 2022.

As at 31 December 2014, the Group had net debt of £624 million (31 December 2013: £732 million).

All of the Group's committed credit facilities have financial covenants requiring EBITDA of subsidiaries to be at least 3.5 times net interest payable and for net debt to be no greater than 3 times EBITDA of subsidiaries. The covenants are tested every six months using the previous 12 months' results. For the 12 months to 31 December 2014, EBITDA was 11.8 times greater than net interest payable, whilst net debt was 0.7 times EBITDA.

The Group entered into a series of cross currency interest rate swaps during the year to better align its foreign currency income receipts in USD and EUR with its debt and had the effect of converting its Sterling bonds into US Dollars ($951 million) and Euros (€284 million). The cross currency interest rate swaps have been designated as a net investment hedge of the Group's USD and EUR net assets. The fair value of the cross currency interest rate swaps at 31 December 2014 was a liability of £26 million (2013: nil).

The Directors have taken into account both divisional and Group forecasts for the 18 months from the balance sheet date to assess the future funding requirements of the Group and compared them to the level of committed available borrowing facilities, described above. The Directors have concluded that the Group will have a sufficient level of headroom in the foreseeable future and that the likelihood of breaching covenants in this period is remote, such that it is appropriate for the financial statements to be prepared on a going concern basis.

Definitions

Financial information set out in this announcement, unless otherwise stated, is presented on a management basis which aggregates the sales and trading profit of subsidiaries (excluding certain subsidiary businesses sold and closed) with the Group's share of the sales and trading profit of joint ventures. References to trading margins are to trading profit expressed as a percentage of sales. Management profit or loss before tax is management trading profit less net subsidiary interest payable and receivable and the Group's share of net interest payable and receivable and taxation of joint ventures. These figures better reflect performance of continuing businesses. Where appropriate, reference is made to organic results which exclude the impact of acquisitions/divestments as well as currency translation on the results of overseas operations. Operating cash flow is cash generated from operations adjusted for capital expenditure, government capital grants, proceeds from disposal of fixed assets and government refundable advances. Free cash flow is operating cash flow including interest, tax, joint venture dividends, own shares purchased and amounts paid to non-controlling interests, but excluding dividends paid to GKN shareholders. Return on average invested capital (ROIC) is management trading profit as a percentage of average total net assets of continuing subsidiaries and joint ventures excluding current and deferred tax, net debt, post-employment obligations and derivative financial instruments.

APPENDICES